Forex market revolves around price behavior and decision making. In order to be successful trader, it is crucial not only to know the formula for market movement, but also understand what is behind it. Without clear perception of what makes prices move, your trading career is doomed. So how does this mysterious formula look like, What is behind it, Which errors can a trader avoid with the understanding price action,
Let’s first consider the components of the vital trading factor – price behavior:
1. The first ingredient is Forex Fundamentals.
Forex Fundamentals are Interest Rates and overall Strength of the economy of the selected country (economic indicators such as PPI, CPI, GPD, foreign investment, trade balance, unemployment data etc.) Forex fundamental analysis identifies and measures financial values, such as economic and political factors, which affect supply and demand:
A� If there is a decrease in supply, but demand level remains the same, the increase in market prices is expected.
A� If there is an increase in supply, bud demand remains similar, the prices are expected to drop.
2. The second ingredient is Trader Perception.
Forex trading relies on human perception of each economical situation. It is human perception that makes the final price behaviour. Millions of traders look at the same charts, at the same factors, using the same indicators, however each and every trader has his/her own point of view which influence the decision, and, therefore, the price itself.
Human nature is very predictable. We are not robots and do not base our decisions purely on logic. Emotions, for better and for worse, are part of our life. Emotions dominate forex trading and can be seen in ever chart, in every decision, in every price movement. Millions of traders, at one specific moment, may be governed by different sensations – hope, greed, fear, anger, disappointment, revenge…
Looking carefully at charts, you can not only see the fundamental impact, but how all the traders have perceived the news. There is no need to guess – charts reveal the reality of the market.
So, the formula for price action is:
Forex Fundamentals + Traders Perception of the News = PRICE
Every trader should realize that no matter how important fundamentals seem to be, what is much more important is the traders’ perception of them.
The market doesn’t move solely by fundamentals. No! The market flips and turns on trader psychology. This is why forex trading is in a way a game of psychology, rather than science. The only thing you can predict, based on previous experience and general knowledge of human nature, the perception of other traders towards each fundamental announcement.
Once you understand what price action formula is all about, you will definitely stay away from:
1. Trading news and events.
2. Adopting day trading and scalping techniques.
3. Predicting prices in advance.
4. Trying to scientify forex trading.
Every trading decision based on technical indicators should include the consideration of the price action. This is the only way to get accurate results.
For example, there is a long signal generated by a MA crossover. The market approaches the resistance level.
The price all of the sudden start bouncing off the resistance level. This should tell you that this signal is not worth it, since the price action shows that the market (aka other traders) doesn’t want to go up any further.
According to my experience, in cases similar to the one presented above, the market will simply continue moving down, completely disregarding the MA crossover.